Not everyone will agree but I am sure it’s closer to the truth than one might think: buying or selling a business is unlike anything else of value. To support my argument there are a number of reasons. Let’s look at some of them.

The price of a business is determined by a valuation. The rules of a valuation come from the law and then legal cases as well as the Internal Revenue Code and custom. The price for most other items of value are determined by market comparables (for example, when valuing a house), looking up a book or some online site such as Kelly Blue Book (for cars) or results from eBay or some other online service (for any item you can think of). That is, there is no legal interference with the value of any these items except a business.

When advertising to find a buyer of these items, with the exception of a business there are no rules. To be clearer, when selling any other item the owner wants the world to know it’s for sale. Regular and established advertising channels are used including online web sites, newspaper or magazine advertising, family, friends and anything else to find a buyer. Conversely, with a business, advertising is done using less familiar methods and in most cases, the advertising is obscure so family, friends, customers, employees, suppliers, landlords, lenders and others are not aware the business is for sale.

When a buyer and a seller enter into negotiations for anything except the business, it’s generally very simplistic and does not need the involvement of third parties. In contrast, negotiating a business often involves complex negotiations with sophisticated parties. These parties can include lenders, landlords, attorneys, accountants, business intermediaries or business brokers as well as hidden support for buyers and sellers such as family and friends.

When selling a business, to get the maximum price possible, normally involves a lot of work for an extended period of time. The steps the seller takes includes trying to increase revenue, recasting the financial statements to arrive at an accurate and supportable discretionary earnings of the business and repairs and upgrades to make sure the business looks the best. Items being sold other than a business can similarly be polished but there is a limit on what can be done and the amount of time to do it.

When the buyer and seller reach an agreeable point in the negotiations of a business transaction, all items must be converted to paper. One of the first items it defines is whether the business is being sold as an asset or stock sale with this single decision has many tax and legal implications. Additionally, this one decision in itself, can set off a series of negotiations or at least, in-depth discussion and analysis by both parties.

In some business transactions, the negotiations can trigger a set of different valuations to support each parties position and whether or not the transaction ultimately closes. For example, if the purchase includes real estate or a large number of physical assets or intangibles such as trademarks or copyrights or the business itself then there could be four valuations. The first is a valuation of the commercial property, the second is a machinery and equipment appraisal, the third is an intellectual property appraisal and the fourth a business valuation.

Buying and selling a business is unquestionably complex. The complexity can include the business and its different assets but added to this is the complexity of the emotions each party brings to the transaction plus the fact that it can sometimes take many months to finalize the matter adding an additional layer of complexity due to life situations happening such as health, legal, family, finance and many other items affecting the process. For a willing buyer and willing seller to eventually close the transaction, it will require patience and clear communication and normally, the help of a good business broker.

If you own a business and receive an unsolicited offer to buy your business please be careful. If your business is currently for sale be even more cautious. There are con artists that have developed a clever process of taking your business from you and leaving you not only with absolutely nothing, but totally destroying your business and leaving you in debt.

Here’s a basic breakdown of their process.

Their easiest target is to contact the owners of businesses for sale, usually via listings on the internet and identify themselves as acting for a private party or a small investment group. They are looking for businesses generally that have at least a $1,000,000 selling price.

If the business is for sale by a business broker or intermediary, they will try to build a strong relationship with the seller. If they feel the broker or intermediary is an impediment to what they are doing, they then try to get the broker or intermediary out of the way by saying to the seller that the broker or intermediary is a hurdle to closing a deal.

Once they have a good relationship with the seller, they then make a strong offer with the condition they finance the deal over a short buy out period (say 6 to 10 months.) The offer will include a small downpayment, say 10% down AND as a stock sale (not an asset sale.) Under this scenario, the seller holds all the stock of the corporation as collateral, and of course, the sale includes the cash, Accounts Receivable and other items on the Balance Sheet.

Once they pay the seller the 10% deposit, they then require signature rights to the business bank accounts, credit cards and other assets while the seller “trains” them in the day to day operation of the business for the agreed two to four week training period.

Once the training is complete, they then clean out the cash, run up the credit cards, factor the Accounts Receivable, may sell off some or get loans on the fixed assets (vehicles, etc.) and do not pay any payable/liabilities. They even sometimes fire employees, usually never paying any of the businesses (or employee’s) payroll taxes or other taxes. Then, they disappear in a month or so having cleaned out the company by taking everything as cash.

Bottom line: These scams really do exist. It’s another reason to make sure your business broker is part of a State Association such as the California Association of Business Brokers or association such as the International Business Brokers Association. If you are planning to sell your business, please give me a call so I can help you. If you want to know how to find a good real estate agent, the California Department of Real Estate has a very good document to read that you can see by clicking this link: http://www.dre.ca.gov/pdf_docs/re16.pdf

One of the hidden and sometimes very surprising scenarios which buyers and sellers of a business experience, comes when there is a need for both parties to agree on the Purchase Price Allocation. The surprise comes into play as most buyers and sellers have not heard of the Purchase Price Allocation and when it needs to be agreed upon, both buyer and seller can find it emotionally challenging, especially if the negotiations have been long and difficult.

So what is the Purchase Price Allocation? The Purchase Price Allocation is a tax reporting requirement on the sale of a business. Both the buyer and the seller must report their own understanding of the Purchase Price Allocation and the IRS can and does check to make sure both parties report the same information.

So where does the challenge come into play? The challenge comes into play because the buyer has a different tax need to the seller. That is, it’s the sellers preference to sell his stock of the company to the buyer as he does not need to pay back any taxes they have claimed as a deduction when operating the business. The buyer wants the exact opposite in that they want to buy assets, not stock, so they can start to depreciate the assets and thereby lower their tax bill.

The general process is for the seller to list the business for sale at a specific price. The buyer does their research, makes an offer and if all goes well, both parties come to an agreement, perform due diligence and close escrow. Just prior to closing escrow is when the Purchase Price Allocation must be agreed upon. If an escrow company is handling the transaction for both parties, they will require an agreement from both parties on what the Purchase Price Allocation should be. It’s not too common, but it does happen, where the buyer and seller have spent months working together on this transaction and then it falls over because they simply cannot come to an agreement on the Purchase Price Allocation. This happens when the negotiations have been stressful and difficult and the frustrations simply come to a head at this point with the Purchase Price Allocation being the catalyst.

The solution to prevent this happening is simply education. If the buyer and seller are aware of what the Purchase Price Allocation requires, then it can be handled quickly and cleanly. There is a need for both parties to give; just like all the other items they have negotiated. Plus, one of the best places to start is with the initial inquiry of the buyer. If the seller has decided he wants to only sell their stock and not do the transaction as an asset sale, by stating this upfront it can lessen that problem.

A lot of buyers are unwilling to buy the stock of a company for two reasons. The first reason is that if they buy the stock of the company they are liable for any previous actions of the seller. This liability can be mitigated through seller personal guarantees and insurances but it still makes a buyer uneasy. The second reason is that the buyer doesn’t get to depreciate the assets from a new tax basis, that is, they simply continue the depreciation rates the company currently gets. If assets have therefore been fully depreciated, the buyer gets no new tax benefit.

Buying and selling a business is more complicated when the tax costs and benefits come into play. It’s the wrong approach to take when buying or selling a business that there is a need to win each negotiation. By definition a negotiation means each side giving. If the goodwill to negotiate is not there, there is little likelihood the transaction will close.

Small businesses are a critical part of the economic landscape. All the businesses on the Dow 30 started as small businesses, reached a critical mass that then led them to becoming a public company and grow to where they are today. Depending on whose statistics you use, small businesses make up 98% of all businesses in the US economy.
One of the benefits of being the owner of a privately held small business is that you get to take tax deductions that wage and salary earners are unable to claim. This is all part of the risk and reward scenario that comes from owning and operating a small business.

When it comes to selling the business, these tax deductions can get in the way as it reduces the true cash flow of the business, which affects the business valuation and therefore how much the buyer is willing to pay. To navigate this scenario, it’s important to understand how to deal with these legitimate tax deductions or as they are called, add backs.

An add back is a legal expense that appears in the financial statements of the business such as the profit and loss statement or tax return but has no true economic value in the performance of the business. For example, most business owners choose to take out health insurance on themselves and possibly their spouse and children. If the spouse and children do not work in the business then it would be legitimate to accept this expense as an add back. In this example there are two critical things. The spouse and children must not be currently working in the business and they must not work in the business once the buyer takes over. Other add backs the business owner may choose to run as an expense through the business includes personal expenses, auto costs be it gas, repairs, maintenance or insurance for non working family members, cell phones and vacations claimed as business trips. Another acceptable add back is the payroll tax paid against the salary earned by the business owner.

Legitimate add backs play an important role when appraising and negotiating a business. They can be contentious but the best approach is to prepare a report that shows what add backs the seller claims as reasonable so the buyer or lender can have an open and honest discussion.

The best approach when claiming add backs is to only claim them if they are sizeable in nature and there are not too many of them. What is sizeable? That depends on each business but I would suggest anything greater than $1,000 is a good starting point and I would not suggest trying to justify every add back or a buyer will feel too uncomfortable as in the end, they don’t want to spend too much time and energy worrying about every dollar and cent.

If you own a house and decide it’s time to sell, you have a choice. You can choose to handle the process on your own in which case you would be a For Sale By Owner (or FSBO) or you can choose to have a real estate agent represent you. If you own a business or are a potential buyer of a business you can choose to handle the transaction on your own or you can choose to have an agent or Business Broker represent you.

If you choose to have a Business Broker represent you, it’s worthwhile understanding that some Business Brokers belong to associations and these associations have a code of ethics. The International Business Brokers Association (IBBA) is an international association that brings together business brokers from many countries. At last count, there were approximately 28 countries in the IBBA.

The IBBA has a code of ethics and this includes the following articles:

Article 1 – Broker is charged with being knowledgeable with trends affecting business opportunities.

Article 2 – Broker must protect public against fraud, misrepresentation or unethical behavior.

Article 6 – Broker represents interest of their client but it is incumbent upon the broker to deal fairly to other party or parties involved.

In addition to the IBBA, there is the American Association of Business Brokers (or ABBA) plus there are many state or regional business broker associations. A few examples include the California Association of Business Brokers (CABB), Texas Association of Business Brokers, New England Business Brokers Association and many others.

The bottom line is that you should have expectations from a business broker or intermediary you using to represent you and your interests. Being a business broker is not normally restricted to just one skill of closing a transaction. Business brokers assist with business valuations, machinery and equipment appraisals, introductions to third party lenders at banks, credit unions or specialized businesses that handle SBA loans, introductions to legal experts or tax and accounting experts and many other professionals.

At the end of the day, a qualified, educated and motivated business broker should add value to the process of buying or selling a business. There are many associations which they can choose to belong and each has their own code of ethics. This should provide great reassurance that your interests come before those of the business broker and it should be your expectation that this is the case.

Selling or buying a business is a complex and involved transaction. The chances of the transaction closing are greatly enhanced when a business broker or an intermediary is involved as the seller and buyer have a lot of professional, personal, financial and emotional items at stake. Make sure the business broker or intermediary reflects your values and adheres to the code of ethics that are part of any association that they belong. In some states, the business broker or intermediary is required to have a license. Make sure that if this is the case, they meet that requirement.

In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.

In the current economy, the seller must be willing to carry a note for part of the purchase price. Very few buyers have the capacity to pay cash for a business. Also, in simple terms, it’s ‘good business’ for the buyer to use cash as a down payment on the business but then leverage the rest of the purchase price via loans as any interest paid is tax deductible. This also allows the buyer to buy ‘more business’ which means if the business is performing well and throwing off the right cash flow, the buyer can get more cash flow for each dollar of down payment. This is obviously attractive to the buyer.

The terms of a deal don’t just swing on the price and whether or not the seller will carry a note. These are both very critical questions but whether a deal works or doesn’t work can include many things. These include how much free training the seller is willing to provide, if the seller is needed to provide paid training after the free training, what costs are incurred for the business to change ownership and who pays them. For example, using a title company to handle the escrow will incur fees, the landlord may charge a fee to process an assignment of the lease, if the business involves a franchise there may be a franchise transfer fee, how long should the covenant not to compete be in terms of distance and time, and there are many other items.

Buying and selling a business involves many complexities. The longer both parties take to reach agreement on the complexities the greater the chance the negotiations will fail as one or both parties burn out from the inability to reach an agreement.

Most business buyers don’t have a shortage of questions they want to ask when they are looking to buy a privately held company or business. There are obvious questions about the level of sales, qualifications and motivation of the employees, the relationship with the landlord, if payment to suppliers is up to date and many other good and appropriate questions.

Apart from these questions, there are others that may help a buyer decide if the business is a good fit for them. These questions include the following:

1. Does the business have any tax liens in place and are there any tax liens against the owner?

2. Does the business have any lawsuits pending?

3. How diverse is both the customer and supplier base?

4. What’s the reason the owner wishes to sell?

5. Is the business in, ever been in or likely to go into Chapter 11 or Chapter 7 bankruptcy?

6. Is the lease transferable and is there a cost to transfer the lease?

7. Are the employees unionized?

8. How could the business be expanded?

9. How could the operations of the business be improved?

10. Has there been any negative press on the business or the industry?

11. Has there been any recent change or upcoming changes that could have a negative impact on the business?

12. Does the business have a good management team or key employees in place?

13. Are there written operations and training manuals that are up to date?

14. Who prepares the financial statements of the business and what certified professional assistance is used?

15. What is the role of the seller in the business on a day to day basis and what documentation exists about the role they play?

A buyer has many questions to ensure they feel comfortable about the business they are buying. The questions are not just about what, where and how the seller is involved in the day to day operation of the business, but about the skills and expertise of the buyer and whether they think they can replicate what the seller does so the business doesn’t decline. There is a saying – no question is a stupid question – and this especially applies when buying a business.

If you are thinking of becoming a business owner, you have three choices. Those choices are to start a business from scratch, buy an existing business or buy the rights to a local franchise. Each option appeals to a different type of entrepreneur. If you more information, you can go to www.businesstransactionbooks.com where you can buy and immediately download a copy of a book on each option and decide what makes the most sense to you.

A transition plan that allows the business owner to sell the business for the highest price possible in the shortest amount of time to the most qualified buyer is generally the top of the wish list for most business owners. Because the business owner lives and breathes their business they become emotionally attached to their customers, employees, suppliers and other business partners as the business is a reflection of who they are.

Deciding to sell the business and move to a new role is much more complicated than most business owners realize. Sure, you can start by putting the business on the market and see what happens, but that’s not a good strategy. If customers, suppliers, competitors or others find out, it can severely damage the business.

So where does the business owner start? It’s my suggestion that one of the starting places is with a transition plan. A transition plan, at its simplest level, is an attempt to define the needs of the business owner and then systematically move to their desired outcome. And I am not just talking about the actual process of selling the business. I would suggest the owner go back to some more basic level and understand why they are selling, what they hope to achieve and probably most important of all, what are they planning on moving to and are they excited about it. If they are not excited about it, chances are they will do all the work to get the business ready for sale, advertise and market the business, qualify the buyers, negotiate a deal, do all the due diligence, prepare to close escrow and then change their mind because they would prefer to continue owning and operating the business than playing endless rounds of golf or become a full-time babysitter looking after the grand kids etc.

So what should be included in the transition plan? The questions and answers can be endless. It’s what makes sense to the owner and their specific situation. Some sample ideas include the following:

•Why does the business owner want to transition the ownership of the business?
•Are there any suitable candidates and if so, why? (The answer could be family or a current employee or a local larger competitor or …)
•If not, why not? (Is the industry the business is in dying out, are there new technologies coming that make this business behind the times etc.)
•Are there any specifics that would prevent the business transitioning that need to be removed?
•What is actually being transitioned?
•Is the owner the business or is the business an independent asset that would be attractive to a buyer?
•How involved day to day is the current owner and if they are heavily involved, are processes and procedures written down that would help a new owner and encourage them to take the risk and buy the business?
•What is the owner’s financial situation? That is, can they afford to retire?
•Does the owner rely on a weekly or monthly income from the business that if stopped because they no longer own the business they can still survive?
•What is the current owner transitioning to?

There is no shortage of questions to ask. The important thing is to ask the questions and keep asking them until they are all answered or its clear what the next steps need to be. The goal of building a transition plan is to clearly help the owner arrive at a decision that makes perfect sense to them and be empowered for any next steps that they take.

The need to use seller finance when trying to sell your privately held company has come back into vogue due to the lack of third party finance being readily available.  Some techniques less known and used, however, are available but require a clear understanding between the seller and buyer and may then need good legal agreements to clarify, protect and define the responsibilities of each of the parties. Here are five options both a seller and buyer may want to consider.

Option One: if the seller of the business has created intellectual property or some proprietary idea that they don’t wish to sell as part of the business transfer, but the buyer needs that knowledge or invention in the business, the seller and buyer can enter into a licensing agreement. The buyer would pay an agreed fee as a royalty.

Option Two: Another means of a seller receiving payment from the buyer of the business can be via Consulting Agreements. These would be constructed according to what works for both parties but provides a way of maintaining the continuity of knowledge the seller has from owning and operating the business while the buyer acquires that knowledge.

Option Three: If the owner of the business wishes to sell because they have arrived at retirement age but the seller has children working in the business, part of the purchase price negotiations could be the buyer extending a Family Employment Guarantee. This meets the need of the seller because they don’t have to worry about their children no longer being able to work in the business and it comes with a payment the seller is comfortable accepting.

Option Four: Two important benefits to most business owners are health insurance and life insurance. Health insurance coverage; especially for business owners with a pre-existing illness means they cannot readily change their health insurance policy to another company. Negotiating the purchase price where the buyer will continue to allow the seller to keep the same policy and pay for it can be a great benefit and relief to the seller. Life insurance and indeed other forms of insurance can be handled in the same manner.

Option Five: One of the advantages of being an entrepreneur is that you can claim expenses that an employee is unable to claim. Membership at the best golf course in town, driving the latest model car, an annual vacation to Lake Tahoe and other perks sometimes become necessities for some entrepreneurs. Structuring the sale of a business to continue the sellers ‘perks’ can be an appealing option; even if it’s only for a year or two.

Seller finance does not have to be restricted to purely a seller note on the transaction. A seller can be used to receiving many business ‘perks’ they have enjoyed from owning and operating their business. Allowing the seller to continue enjoying those ‘perks’ can be a good strategy when buying a business.